Alex Otsu is the founder of PixelAlpha, the derivatives exchange for cryptoassets. Talk to him in the Telegram group and learn about how tokenization will be the future of derivatives.

If you follow the blockchain/cryptocurrency space even loosely, you have likely heard of the term “tokenization.” If you are having trouble understanding exactly what that means, then this post is for you.

Tokenization is simply the process of encoding something from the real world onto the blockchain, then using that blockchain to verify ownership. So why is it such a hot topic? Because it combines the best of human capabilities with the best of machines’. Humans are very good at assigning value, and computers are very good at tracking it. Layer that on top of a public blockchain that is viewable by anyone at any time, and you have a system that is a tailor-made ledger to account for ownership of everything.

To illustrate, let’s say you are buying a house.

The current homeowner is using blockchain to sell her house, and they create **1 Hauscoin, **setting the price at 50 Bitcoin. It serves the exact same purpose as a housing deed does today. The Hauscoin lives on the blockchain and can have hard coded behavior that dictates it be transferred to your address as soon as you deposit the asking price of 50 Bitcoin. The transaction is broadcast to the whole network, and the ownership status of the Hauscoin (and therefore the house) is updated to being in your wallet. No agents, no deed re-signing, only a simple transaction.

Above is an example of ownership finality. The Hauscoin sits in a wallet that only you can access via your private key, but is visible to the entire public network. You can now take things a step further by introducing smart contracts to program in behaviors like property tax payment, rental agreements, and more.

An additional benefit to ownership finality is divisibility. If you don’t have 50 Bitcoin right now, you could buy 0.1 Hauscoin or 0.01 Hauscoin which would represent a commensurate ownership stake in the property. You would then be entitled to all of the advantages that come with your percentage ownership — perhaps it is rent sharing, or living in it a certain number of days out of the year, or collateralizing it for a business loan. Moreover, this divisibility means ten people who don’t know each other can buy 0.1 Hauscoin each and be programmatically entitled to the same benefits.

The final reason this post covers on why tokenization is attractive is transparency. In the same way the blockchain tracks current owners of things, it also has an immutable history of past owners. In the case of your house, you see can see that it had a history of high ownership turnover. That is probably a red flag, so you decide to investigate further. You contact one of the past owners through their wallet address, and they tell you they sold immediately because they got news that a big highway was going to be built nearby within the next 2 years. Good luck getting a real estate agent to tell you that.

Quick caveat: Blockchains themselves are trustless, but tokenized asset delivery is only as good as the issuing party. Since the Hauscoin represents a physical asset, it requires trusting that the issuer will honor the deal and hand over the physical keys once the blockchain transaction is completed. I predict there will be an entire legal renaissance around meatspace enforcement of smart contract transactions, but that is a post for another time.

Hopefully this has shed some light on tokenization, and let me know when your housewarming party is :).

I leave you with the words the great Anthony Pompliano (Twitter: @APompliano): “Every asset in the world will be tokenized”